Posted by Rob Minton
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In case you somehow missed it, President Obama last week signed an extension of the tax credit for first-time home buyers.
The credit that was set to expire on Nov. 30 will now be available to those who have an offer accepted by April 30 of next year and close by June 30. Buyers who haven't owned a home in the past three years are eligible for a credit of 10 percent of the home's purchase price, up to $8,000.
What's interesting, though, is that the bill that carried this extension for first-timers also has a provision for "move-up" homeowners. Anybody who has lived in their home for five years will get a tax credit of up to $6,500 if they purchase a home of greater value.
Why is this new provision included? Well, because while somewhat successful, the original first-time buyers credit didn't have all the economic effect lawmakers and those in the real estate industry would have liked it to have.
One criticism was that of about 1.4 million Americans who qualified for the first run of the credit, only about 350,000 homes were purchased by those who wouldn't have bought had it not been for the tax credit. Sure, that's a 350,000-home reduction to the inventory glut of homes on the market we have -- but it's not enough of a dent to help the overall economy much.
This real estate problem in the U.S. is kind of a circle. The number of foreclosures that hit the market in the past couple of years helped sink prices. With sinking prices, more homeowners owed more on their homes than they were worth, which leads to more foreclosures. More foreclosures lead to more inventory, and more inventory leads to sinking prices.
On top of that, with credit tightening up, there were fewer buyers out there. More inventory with fewer buyers meant further pressure on prices. So the government, recognizing it had to do something with the real estate market in order to help the overall economy, set out to A. slow down foreclosures; and B. increase buyers while decreasing inventory.
And the tax credit helped bring buyers to the market, which in turn helped reduce inventory. THAT in turn, has helped prices finally start to stabilize. They are, in fact, creeping up in some markets.
What didn't happen, however, is the the full effect everybody was hoping for.
"It did not have the chain reaction impact it was supposed to," National Association of Realtors Chief Economist Lawrence Yun was quoted as saying in aCNN/Money article. "Instead, many first-timers turned to vacant, foreclosed or other distressed properties the sellers of which were unlikely to be move-up buyers."
So by extending a credit to current homeowners, the hope is that more people will enter the market and homes prices will further stabilize. The thinking goes that as home prices stabilize -- beyond the lower end of the market -- more consumers should be more confident in their spending, which will further stabilize the overall economy.
So the effort has been made to further close the circle that is the real estate market. Will it work? Only time will tell, but trying to involve more people in that circle could be a big step.
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